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 July 28, 2008
MEDICARE REFORM BILL PASSES On July 15, 2008 Congress passed the Medicare Improvements for Patients and Providers Act of 2008 (Public Law No. 110-275)1 over President Bush's veto. This legislation eliminates a reduction in Medicare physician payments that was scheduled to begin July 1, 2008 and includes several reforms to the Medicare program. Most significantly, it makes changes to Medicare Advantage Private-Fee-for-Service (PFFS) plans that will affect plan sponsors of retiree health plans. This Capital Checkup discusses some of the provisions in the legislation that most affect these plan sponsors. In order to pay for the reforms in the Medicare Improvements for Patients and Providers Act of 2008, the legislation effectively cuts Medicare Advantage (MA) payments for PFFS plans through changes to networking and contracting rules. Although the payment rules for PFFS plans are not amended, these other changes will likely result in reductions in the rate of enrollment in these plans. In addition, the Medicare Improvements for Patients and Providers Act of 2008 reduces indirect medical education (IME) payments to all MA plans.
Background on PFFS Plans PFFS plans were introduced more than 10 years ago in part to improve access to MA plans in rural areas. Over the past few years, the popularity of these plans has grown tremendously. Enrollment in these plans has increased by more than eight times over the past two years. Of the 9.6 million people currently enrolled in MA plans, 2.3 million are enrolled in PFFS plans. PFFS plans are not required to meet the provider network adequacy requirements that apply to other MA plans. The PFFS plans are "deemed" to have a contract with a provider that meets Medicare's network adequacy requirements if providers are paid at least the fees that would be paid under traditional Medicare fee-for-service. Not having to meet the same provider network adequacy requirements as other MA plans operates as an incentive for PFFS plans to cover individuals in rural areas. Beneficiaries in PFFS plans can go to any provider as long as the provider both accepts Medicare and agrees to their PFFS plan's terms of payment. Providers can accept or reject plan terms at the point of service. PFFS plans have been heavily marketed to employers that offer retiree health benefits. Without network adequacy requirements, it is easier for PFFS plans to enter the market and offer national or almost-national coverage.2 This is more appealing to plan sponsors with retirees in different parts of the country than local MA health maintenance organizations (HMOs) and preferred provider organizations (PPOs). Also, due to the current structure of how MA plans are paid, and the increased amount of reimbursement to MA plans since 2004,3 PFFS plans may be a more cost-effective way to provide retiree coverage for many plan sponsors. These plans generally provide extra benefits beyond what is required under Parts A and B of Medicare, and in some cases have lower out-of-pocket costs for retirees. Despite the positive aspects of these plans, they have been criticized as having an unfair advantage in the marketplace, and as a drain on Medicare resources. Estimates have shown that PFFS payments are much higher than what CMS pays for providers under traditional Medicare fee-for-service in the same county. The introduction of private plans under Medicare was supposed to increase efficiencies in the program by providing better benefits at a cheaper cost. Some have argued that the PFFS plans do exactly the opposite because excess payments to these plans promote inefficiency and further jeopardize the financial future of Medicare. PFFS plans operate under a different set of rules in addition to network adequacy requirements. Unlike other MA plans, they are not required to offer the Part D prescription drug benefit, and do not have to meet certain quality standards that other MA plans must meet.4
Medicare Improvements for Patients and Providers Act of 2008 Changes to Medicare Advantage Plans The legislation requires that PFFS plans operating in an area where there are at least two network-based5 MA plans must meet Medicare's provider network adequacy requirements by entering into a written agreement with providers. They will no longer be deemed to meet these requirements in these specific areas of the country. This change applies to PFFS plans providing coverage to individuals, as well as plans providing coverage to employer groups. This change is effective beginning in 2011. Other MA changes include the phasing out of certain payments for indirect medical education (IME) costs at teaching hospitals. IME payments are designed to defray the higher costs teaching hospitals incur for patient care. Currently the Medicare program is making IME payments on behalf of MA enrollees twice: first by direct payments to teaching hospitals for their MA enrollees, and second, by including IME costs in the benchmark which MA plans bid against. The change would eliminate this duplication by phasing out the second indirect payment to all MA plans. The law also removes remaining monies from the MA stabilization fund. This fund was created in the Medicare Modernization Act of 2003 to make additional payments to regional PPOs to encourage them to participate and remain in the MA program.
Changes to Medicare Part D The law makes several changes to Medicare's prescription drug benefit. These include the following:
Other Reforms The law also includes a long list of payment and coverage improvements to Part B of Medicare including coverage for new preventive services, improvements to the welcome to Medicare physical benefit, and increases in payments for ambulance services and to dialysis reimbursement rates. The law provides new incentives for physicians to use electronic prescribing (and then requires them to do so starting 2011) and to provide certain quality reporting. The Medicare Improvements for Patients and Providers Act of 2008 also delays the implementation of a durable medical equipment competitive bidding program. The delay is paid for by reducing payments for all direct medical education (DME) items included in the delayed bidding program.
Implications for Plan Sponsors When the PFFS plan changes are effective in 2011, some PFFS plans will likely choose not to participate in the market rather than contracting with providers. The Congressional Budget Office (CBO) estimates that changes to the MA program (PFFS changes and the IME phase out) will reduce federal spending by $47.5 billion over the period from 2009 to 2018.7 The CBO concludes that the PFFS plan change would result in fewer individuals enrolling in all MA plans (including PFFS, HMOs and PPOs) than previously projected. The CBO had projected that by 2013 there would be 14.3 million enrolled in MA plans, of which 5 million would be enrolled in PFFS plans. Taking the Medicare Improvements for Patients and Providers Act of 2008 into account, the CBO now concludes that 2.3 million individuals would not enroll in an MA plan, and would instead enroll in traditional fee-for-service Medicare. The PFFS changes alone would result in 1.8 fewer enrollees in all MA plans in 2013 (1.5 million from individual plans, 300,000 from employer-group plans). CBO also concludes that the PFFS plan changes would encourage some enrollees in PFFS plans to switch to MA HMO and PPO plans, but did not estimate a specific number. This switch from PFFS plans to traditional Medicare will affect plan sponsors of retiree health programs, perhaps increasing demand for separate supplemental benefits provided by plan sponsors for those enrolled in traditional Medicare. The CBO projects that over 2 million individuals will enroll in traditional Medicare from a MA plan. Although these are just projections, plan sponsors should reassess the viability of their PFFS offerings going forward. Note that requirements to add a network in PFFS plans will not apply to every area of the country. However, plan sponsors providing PFFS coverage nationally will likely be affected. The CBO does project some movement from PFFS plans to other MA offerings. Given the new network requirement in PFFS plans, plans sponsors should compare PFFS offerings with other MA plans such as MA-PPOs and MA-HMOs. To the extent that all MA plans will be operating on a more even playing field, MA plans other than PFFS plans will likely become more attractive for plan sponsors. Several MA organizations may end up converting their current PFFS products to MA-PPO products. The reduction in IME payments applies to all MA plans, but will affect markets differently depending on the number of teaching hospitals in the market. The reduction in the MA stabilization fund, although saving the government approximately $1.8 billion dollars over 10 years, will have limited, if any, impact on the market because these funds had not been allocated to any MA plans. Overall, plan sponsors with retirees in MAFFS plans could see higher costs due to the reduction in reimbursement to PFFS plans.
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